It’s hard to know what’s actually “set” for strong returns over the near term or even the medium term. However, over the long term, I do think that those looking for superior risk-adjusted results may wish to look at names that skew on the undervalued side, with underestimated catalysts that could kick in at some point down the line, whether in the new year or within the next three to five years.
At the end of the day, it’s structural, long-lived tailwinds and strong fundamentals that prevail. And, of course, none of that matters if you’re not getting into a stock at a valuation that makes sense.
While you don’t need a steal of a deal, I do think that getting any sort of discount on a firm that’s well-positioned over the long run can be a winning strategy.
As always, though, a long horizon and careful analysis of the earnings road ahead (it helps if a firm actually has a predictable earnings growth profile), as well as the state of the balance sheet (that’s extra important, in my view, as interest rates begin to move higher from here).
In any case, let’s get into one name that I consider to be among the brightest of dividend stars on the TSX Index. And, right now, shares are going for a multiple that isn’t all too extreme, especially given their solid fundamentals and potential catalysts that could stick around for some years.
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Alimentation Couche-Tard
Convenience store consolidation titan Alimentation Couche-Tard (TSX: ATD) might not have the largest dividend yield out there (currently just north of 1%), but it does have a very predictable dividend growth profile as well as an opportunity to drive meaningful synergies as it looks to get back in the deal-making fast lane. With a strong balance sheet and plenty of optionality as fellow convenience store chains face a bit of pressure amid inflation and other macro headwinds, I must say that I like Couche-Tard’s prospects.
In addition to the M&A potential, I must say I’m a huge fan of the innovation that’s going on behind the scenes. If you’ve been to the McGill concept store in downtown Montréal, you might just get a feel for where Couche-Tard and its many stores could go in the 2030s. I’ve been to the Couche-Tard Connecte location and must say I was blown away by how quick and easy it was to grab, pay and go.
Indeed, AI-powered checkout and tech-enhanced self-serve could be the future as Couche-Tard becomes more of a futuristic high-tech play than just a gas station convenience store. If Couche-Tard gets food, tech, and M&A right, I see multiple paths higher for a stock that, in my view, trades at a ridiculously low multiple of 17.1 times trailing price-to-earnings (P/E).
With the firm making a bid for Cumberland Farms, a stellar convenience retail asset that could be worth as much as $8 billion and is renowned for its food offerings and embrace of tech, it feels like Couche’s M&A engine is starting to rev up again. I think that bodes well for investors getting in here while shares are going for $81 and change per share.
The bottom line
Couche-Tard is back and the latest pressure on shares, I think, is unwarranted, especially when you consider the kind of consumer staple growth you’re getting, growth that doesn’t hinge on the AI trade not crumbling.
